Tiny portfolio: trading the cheapies in S&P 100 with downside options protection.

[ukoptions]

Hi there.

I've been researching options as protectors (and income generators) for investors/traders who are otherwise just ordinary stock-holding Joes or Joannas.

So with the New Year, I thought I'd start a new Journal describing my experiences with the cheapies on the S&P 100.

I thought that sorting the constituents of the S&P 100 by their stock price was a novel way of potentially "getting on-board" this portfolio, even if funds are limited.

And option protection will always be available, as a requirement to be included in the S&P 100 is that there are options trading for that stock.

I hope the strategy will grow and become refined as time passes, and as I hopefully receive helpful comments too.

I've ticked the box for Thread Privacy, so please contact me if you'd like to post comments so I can add you to "My Contacts" list - then you'll be able to comment on this thread.

At the outset, then, my plan is to buy the 30 or so cheapest stocks on the S&P 100 Index, and protect the downside with Put options (sometimes called "married puts").

The idea here is to eliminate any worries about:

a) dramatic gaps down on the open, which conventional stop losses can't cope with; or

b) a complete downturn in the entire market, like in 2008, when even a diversified portfolio couldn't help you because every sector went down.

Call me naive if you like, but the thinking here is that with Put options providing the downside protection in place, then you don't need to setup a stop loss, and you don't spill your coffee on your pants if there's a sudden unexpected dive in either one particular stock or in the overall market.

I set up the portfolio on the last trading day of last year (31st December 2010) and so I'm writing this first post on the first weekend of 2011, with results for the first trading days of 2011 to display.

The trading summary from the first week's activity is provided by the Optionshouse virtual trading platform, and I have posted it in spreadsheet format is at:

http://www.editgrid.com/explore/user/lagoonboy/account_positions_01-09-2011_Sunday

Just above the column headed "Description" there's a blue square with a down-pointing arrow in the centre, and clicking this offers downloading.

Here's what the S&P 100 has been doing this week:

(Also at: https://docs.google.com/leaf?id=0B )

And if you'd like to learn more about the S&P 100, especially its constituent stocks, then see the left sidebar at:

http://finance.yahoo.com/q/bc?s=^OEX&t=5d&l=off&z=l&q=b&c=

If you'd like to comment, please click on "ukoptions" on the left of this post to see the ways to contact me, and ask to be added to "My Contacts" list.

I'll give more details about the particular constituents of this Tiny Portfolio, and the progress to date (both of the stocks and their associated Put options) in the next post.

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[anley]

Re: Tiny portfolio: trading the cheapies in S&P 100 with downside options protection.

You're naive if you buy puts for protection.

All that will do is drain your account overtime so there's nothing left.

 

[ukoptions]

Re: Tiny portfolio: response to Anley.

Hi Anley.

Thanks for your comment.

You may be right.

Part of the reason for doing this Journal is to see just how option costs impact, and to see how options behave day-to-day.

However, when the entire market went down in 2008 there was nowhere to hide. The only people who weren't crying - indeed, who were probably smiling - are those who had protected their entire portfolio by buying Puts when they bought the stocks.

So risk-averse people (and that might not include you, Anley ) can sleep real easy at night knowing the Puts are in place.

And this Journal will hopefully demonstrate if that easy sleep is too costly - please stay along for the ride.

Cheers,
Uk

 

[anley]

Re: Tiny portfolio: response to Anley.

However, when the entire market went down in 2008 there was nowhere to hide. The only people who weren't crying - indeed, who were probably smiling - are those who had protected their entire portfolio by buying Puts when they bought the stocks.

The trouble is they weren't in the market in 2008 because they had pissed all their money away buying protection (puts) from 2003 till 2007/8. All those puts expired worthless.

Buying puts as a protection is a fools game unless your timing is 95% right, which is won't be. Don't take it personally, my timing and 95% of people reading this, their timing won't be right which means all the money will be lost on puts.

 

[ukoptions]

Re: Tiny portfolio: progress report for Weeks 1 to 3, plus new portfolio in Week 4.

Below I show a single picture of three spreadsheets, giving an indication of the market's effect on the portfolio.

Here you can see the stocks grouped on the right-hand side, and the spreadsheets are sorted on the returns from the stocks, from the highest to the lowest - those in profit at the top, losses to the bottom.

The losses showing on the Put options on the left-hand side are a bit misleading - they'll only happen if you simply sell them.

But the reason we bought the Puts was to exercise them, i.e. to opt to force the sale of one of our losing stocks at the strike price of the Put, rather than at the much lower current price.

So, for instance, if we bought stock XYZ when it was trading at $20.05,

and then bought an XYZ Put with a strike price of $20 for $1.85,

then if XYZ falls to $14 then we would probably choose to exercise the Put option.

This lets us receive the Put's strike price of $20 for our stock, irrespective of the current price of XYZ.

So buying a Put is like house insurance - you see it as an acceptable extra cost which you may not need to use. But if things go wrong, you'll be real glad you did buy it.

(Also at: https://docs.google.com/leaf?id=0B-2uvo7BEWfwYTFlMjI4MjktYTkzOC00MTIxLWI1NWQtZmFkZWU4NDNjNWU5&hl=en&authkey=CJqTwtoD - click the "Open" link; then click on the image to make it show full size).

The actual spreadsheets, which can be downloaded by clicking on "File/Export As...", are at:

http://www.editgrid.com/user/account_positions_01-09-2011_WEEK1

http://www.editgrid.com/user/account_positions_01-13-2011_WEEK2

http://www.editgrid.com/user/account_positions_01-20-2011_WEEK3

Fearing a downturn, I decided to sell off this particular portfolio entirely, and instate one that has Puts with strike prices above the purchase price of the stock, i.e. In-The-Money Puts.

So I sold the lot on January 20th, and then bought the new portfolio on the following Monday.

It was kind of fun to just decide to "sell everything in sight", but it soon became rather tedious clicking the same sequence of links on the trading platform.

But for those of you out there who can't sell, even when the stock is plummeting downwards, I recommend you get a virtual account and learn to enjoy selling - it is strangely cathartic.

So here's the calendar

Here's the screenshot of Week 4's spreadsheet:

The link to the spreadsheet:
http://www.editgrid.com/user/lagoonboy/account_positions_01-28-2011_WEEK4_XLS

 

[ukoptions]

Re: Tiny portfolio: progress report for Weeks 1 to 3, plus new portfolio in Week 4.

I was intending to start bringing in some income by writing covered calls against the current stockholding,

But sadly I'm poorly, and not really able to continue with this journal.

Nevertheless, I hope you enjoy this song that summarises the situation fairly well.

http://www.youtube.com/watch?v=aR9Nit-3VDg

That's all folks!